PART-I.

Question 1. Suppose you are a consultant for a perfectly competitive firm seeking an assessment of its policies in the short run. What would you recommend in terms of quantity changes (raise, cut, shut down, or stay put) and price changes (raise, cut, or stay put) in each of the following situations (a through c):

a. [10 points] P = $22; MC = $20; AVC = $21.

b. [10 points] MR = $21, MC = $21, AVC= $20.

c. [10 points] P = $21, MC = $21, AVC = $22.

[Notations/Abbreviations: P = Price; MR = Marginal Revenue; AVC = Average Variable Cost; MC = Marginal Cost]

Question 2. [10 points] Is the following (italicized) statement true or false? Explain.

Own price elasticity of demand is constant for a demand curve specified as a rectangular hyperbola.

PART-II.

Question 1. Suppose you are a consultant for a monopolist seeking an assessment of its policies in the short run. What would you recommend in terms of quantity changes (raise, cut, shut down, or stay put) and price changes (raise, cut, or stay put) in each of the following situations (a through c):

a. [10 points] P = $28; MC = $29; AVC = $27

b. [10 points] MR = $48; MC = $28; AVC = $38

c. [10 points] MR = $28; MC = $29; AVC = $28

[Notations/Abbreviations: P = Price; MR = Marginal Revenue; AVC = Average Variable Cost; MC = Marginal Cost]

Question 2. [10 points] Novidville hosts two vaccine producers: Figerma and Mogerma. In a game, each producer must choose either to advertise or not to advertise its vaccine. Kitcoin (K) is the only currency in circulation. The game can yield one of the following four outcomes (1 - 4) that are mutually exclusive and exhaustive:

1. Figerma would collect 60K and Mogerma would collect 10K, if both vaccine producers advertise;
2. Figerma would collect 90K and Mogerma would collect 80K, if neither vaccine producer advertises;
3. Figerma would collect 70K and Mogerma would collect 100K, if Figerma advertises but Mogerma does not advertise;
4. Figerma would collect 50K and Mogerma would collect 40K, if Mogerma advertises but Figerma does not advertise.

The goal of each producer is to collect as many Kitcoins as possible by playing this game. Does a Nash equilibrium exist for this game? If so, identify the Nash equilibrium and justify your answer. If not, explain why a Nash Equilibrium does not exist for this game.